All Eyes on Equity Indices as Volatility Reappears

Concerns about rising interest rates, trade disputes and the technology sector contributed to declines for all three major U.S. stock indices.

Wednesday saw a significant selloff in U.S. stocks, with the S&P 500 falling 3.29% and the Dow Jones Industrial Average down more than 830 points. Members of the Raymond James Investment Strategy Committee provide their thoughts on Wednesday’s market activity below.

The near-term prospects for the economy remain strong, but there are concerns about the November election, trade policy disruptions, tighter Fed policy, a stronger dollar, risks to global growth, and labor market constraints. All else being equal, higher long-term interest rates are not good for the stock market, unless earnings growth is strong enough to offset that. In the short term, a weak stock market normally pushes bond yields lower. Expect increased volatility and see-sawing markets in the near term.

– Scott Brown, Ph.D., Chief Economist, Equity Research

I have spent the last couple of weeks speaking with U.S. and China trade experts and they universally think things are getting worse. A key issue that has not received any attention in the U.S. is how domestic political pressure in China is making it really hard for Xi to cut a deal. They do not want new foreign competition. I am also hearing that China is placing too much hope on a Democratic victory in November, thinking it weakens Trump. Even if Democrats win, it does not change things. I think the concern that we are in for a bumpier and longer ride than expected is contributing to the uncertainty.

– Ed Mills, Washington Policy Analyst, Equity Research

The fixed income markets, which have been showing some softness on the long end, firmed up on Wednesday as the equity market looked to be going through a legitimate pullback. While much of the focus is on the equity markets, do not ignore the fact that we are seeing higher yields in bonds than we have seen in some time.

– Nick Goetze, Managing Director, Fixed Income Services

Coming into this week, we noted that there was a negative energy blast due early week, which would likely be over by late week. Well, it is now “late week”, and the Relative Strength Index (RSI) is about as washed out as it was during the February 9, 2018 “undercut low” that we recommended buying. Likewise, the S&P 500 is about one standard deviation below its 50-day moving average, and the various stochastic indicators are also washed out. So, unless this is a crash (we doubt it), you should get your buy lists ready.

– Jeff Saut, Chief Investment Strategist, Equity Research

It’s too early to tell if the recent selloff in the U.S. will be followed by a larger global selloff in equities. While international markets did decline, they held up better than the U.S., but most were already closed by the time the U.S. market experienced its largest declines. Technology and high growth areas of the market that have driven much of the return this year felt the largest declines as stress from a variety of places put downward pressure on their prices. We have been advocating improving the quality of investors’ portfolio allocations, including moving up the market cap, improving quality in fixed income, and adding exposure to low volatility U.S. stocks.

Economic and earnings growth support our “buy the pullback” theme. We think the new worries regarding interest rates are “noise”, given our belief that U.S. yields are not set to run to the upside (due to modest inflation and wage growth, low global yields, U.S. economy growing above trend and likely to moderate in the coming years). Range-bound trading may develop over the coming weeks as investors balance strong economic and earnings growth with rising interest rates and the trade battle with China. Nevertheless, strong economic conditions and earnings growth outweigh other issues for now.

The S&P 500 is now back to where it was in early July and has now fallen a bit over 5% from its all-time high set last month. While it’s happened very quickly, that’s still very much in the realm of a normal market dip, so it’s still too early to panic or overreact. The bad news is that we did not really see a bounce into the close on Wednesday, which increases the chances that we see continued selling today (Thursday). The good news, though, is that the market is already hitting washed out levels that have historically marked bottoms. Now, we look for signs of buyers coming in to support this market.

– Andrew Adams, CFA,CMT, Senior Research Associate, Equity Research

Energy stocks followed the broader market down yesterday – despite the fact that the commodity landscape remains very healthy. Spot oil prices for both WTI and (especially) Brent are near their highest levels since mid-2014. Though the commodity market is indicating that oil prices will be heading lower from here on, we disagree. Notwithstanding normal short-term volatility, we believe that prices will be generally higher in 2019, with a likely cyclical peak in 2020 due to the International Maritime Organization’s 2020 sulfur regulations. Thus, we would take advantage of any equity dislocation to buy quality oil-levered equities.

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referenced in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. It is not possible to invest directly in an index. Commodities' investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

TAG CLOUD

Raymond James financial advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered. Therefore, a response to a request for information may be delayed. Please note that not all of the investments and services mentioned are available in every state. Investors outside of the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Contact your local Raymond James office for information and availability.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Investment advisory services offered through Raymond James Financial Services Advisors, Inc.. Wheelhouse Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.